What is the needs approach to determining amounts of life insurance based upon?

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You decided life insurance is worth it and would like to buy a policy, but now you have one all too common question: How much life insurance do I really need?

There’s no single answer to that question, but there are ways to make it easier to choose a policy that fits your current and future needs. This life insurance calculator can help.

Calculate How Much Life Insurance You Need

Here’s an easy-to-use calculator to help you determine how much life insurance you need.

Basic Life Insurance Need Calculation

You can also determine your life insurance need with a pencil, paper and this basic equation: 

[Financial obligations you want to cover] – [existing assets that can be used toward bills] = Your life insurance need

Here’s what you might include in “financial obligations you want to cover”:

• Income replacement: Multiply the salary you want to replace for the number of years you want to replace it. You want this income replacement to cover current and future expenses.
• A mortgage: You can include the balance of a mortgage so your family can stay in their home without fear of losing it. If income replacement (above) would already cover mortgage payments and other expenses, no need to add more mortgage money.
• Other large debts: Would your family struggle with other large debts if you passed away unexpectedly? If so, add those in.
• Children’s college tuition: Add tuition money to ensure your children can pay for college if you were no longer around.

Here’s what you could include in “existing assets that can be used toward bills”:

• Existing life insurance: If other life insurance is already in place to provide a financial cushion, subtract that amount. Be careful about relying on supplemental life insurance from work though—since it doesn’t go with you if you leave a job, you can’t be sure you’ll have it later on.
• Savings: Subtract any savings your family would use to pay expenses. You can include retirement savings such as a 401(k) plan, or leave it out of your analysis if your beneficiaries want to preserve that amount for retirement years.
• College 529 savings: If you have a 529 account with money in it for your children, you can subtract it from your life insurance needs.
• Funeral expenses: Many people want life insurance to cover funeral and final expenses. If this cost isn’t part of a larger policy, some people buy burial insurance.

Other Methods for Calculating Life Insurance Needs

You may run across other methods for calculating how much life insurance you need. These usually include:

Multiply Your Income by 10

Or by 5. Or by 17. This rule of thumb is hard to pin down. We’ve seen many numbers attached to it. And it likely won’t help you pin down an appropriate amount of life insurance. Better to look at your total needs and subtract the assets your family could use if you passed away.

Multiple your income by 10, and add $100,000 per child for college expenses

If you want your life insurance policy to help pay for your child’s college tuition and other related expenses, multiplying your income by 10 may not be enough. For instance, if you make $90,000 a year and have two children, your total life insurance need would be $1.1 million.

This equation may offer a simple strategy to determine need, but doesn’t account for other expenses, assets or unique situations. A life insurance calculator will offer you a more accurate representation of your needs.

The DIME Method

DIME stands for debt, income, mortgage and education. The method has you add up these amounts:

• Debt: How much debt would you leave to other people? This could include credit card debt and student loans that aren’t forgiven at death.
• Income: Multiply your income by the number of years you want to provide income replacement for your family. Some sites advise using the number of years until your youngest child turns 18, but we all know that kids often need financial help longer than that.
• Mortgage: Add your mortgage balance to your running total.
• Education: Add an amount that covers tuition, room and board for each of your children who will go to college. The College Board regularly publishes trends in college pricing.

The DIME method is a good start for calculating a life insurance need, but it ignores existing financial resources that your family might tap for expenses. By itself, it could leave you over-insured.

What’s The Rule of Thumb for How Much Life Insurance You Need?

A common rule of thumb for determining how much life insurance you need is to multiply your salary by ten. Some experts recommend multiplying it by 5 or 7.

That may be a simple way to determine how much you need, but it’s not a good method.

The best way to find out how much life insurance you need is to add up the financial obligations you want to cover (such as income replacement, a mortgage) and then subtract assets that could be used by your family (such as savings or existing life insurance).

If you’re not sure, speak to a financial advisor who can help you determine your needs.

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Why Do People Buy Life Insurance?

The reason people purchase life insurance varies by race and ethnicity, according to the 2022 Insurance Barometer Study by LIMRA and Life Happens, insurance industry groups.

Across all races and ethnicities, including Asian, Black, Hispanic and white, two of the most common reasons people purchase life insurance are to:

• Cover burial and other final expenses
• Replace lost wages if the person dies

Black (67%), Hispanic (69%) and white (55%) individuals most frequently cited burial and other final life expenses as their primary driver for purchasing life insurance. Among Asians surveyed, the most common reason (46%) to purchase a policy was to replace lost wages.

Other leading reasons for purchasing life insurance include:

• Transferring wealth to others
• Providing funds to pay off a mortgage
• Supplementing retirement income
• Providing funds for heirs to pay estate taxes

Nearly half (44%) of households said they would face financial hardship within six months if the primary wage earner were to die prematurely, according to the 2022 Insurance Barometer Study. For 13% of households, financial hardship would hit within one month.

The Life Insurance Gender Gap

There is a substantial gender gap in life insurance ownership. While 51 million men said they need life insurance coverage, nearly 12% more women (57 million) said they need coverage, according to the 2022 Insurance Barometer Study.

And when it comes to men and women who have life insurance, perception does not always meet reality. Most Americans (93%) say men and women should have equal life insurance coverage, according to a 2021 USAA life insurance survey. But in relationships between men and women where both partners have life insurance, nearly one in three women say their partner has more coverage.

USAA’s survey also found that 81% of men say they have taken steps to prepare their family’s finances in the event something unexpected were to happen versus 72% of women.

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How Much Life Insurance Do You Need FAQ

What’s a good calculation for how much life insurance you need?

Use this formula:

Financial obligations you want to cover (such as your annual income for a certain number of years)

-Minus
Existing assets that can be used toward obligations (such as savings)

= Equals

Your life insurance need

Once you have an idea of how much life insurance you need, you can start comparing life insurance quotes

What are some tips for buying life insurance?

When you’re buying life insurance, it’s a good idea to look at more than just the price. Your health and insurance needs will evolve over time, and a good life insurance policy can accommodate those changes. For example, the best term life insurance policies can be converted to permanent life insurance.

Another good tip is to prepare for the life insurance medical exam. With a few tweaks of your daily routine and diet leading up to the exam, you can improve your chances for better results, which can help you land better rates.

Here are more life insurance tips.

What are the three types of life insurance?

The three main types of life insurance are term life, whole life and universal life insurance.

The most premium money goes toward whole life and fixed and indexed universal life insurance (35% and 34%, respectively. About 24% of premium money goes to term life, according to LIMRA.

How much life insurance do I need at age 60?

If you have a family member or loved one who financially depends on you, the amount of life insurance you buy should reflect that.

To determine how much coverage you need, consider how much money your life insurance beneficiary would need to cover expenses in your absence. This can include expenses that were covered by your income, existing debts or a mortgage payment, tuition  and end-of-life expenses.

Once you determine what expenses you want covered, you can use a life insurance calculator above to identify an appropriate amount of coverage.

Should you use life insurance as an investment?

Term life insurance policies carry no cash value and therefore cannot be used as an investment.

Permanent life insurance policies, like whole life and universal life insurance carry a cash value that grows on a tax deferred basis.

Depending on your goals and larger financial strategy, a cash value life insurance policy may make for an effective investment vehicle. However, if you’re considering life insurance as an investment option, it’s best to weigh the pros and cons against other investment accounts, like IRAs and 401ks. It’s also a good idea to speak with a financial advisor.

What are the two methods used to determine the life insurance amount?

What is the easy method of determining life insurance needs?

How much insurance is required for a person on need based approach?

What is the most accurate method to determine life insurance needs?